More About the Responsible Corporate Officer Doctrine

Time-honored legal principles typically shield corporate officers and shareholders from direct personal liability for legal violations of the corporation itself, consistent with the notion that the corporation itself has a distinct and separate legal identity. However, as I noted in a prior post (here), courts have evolved a concept called "the responsible corporate officer doctrine," pursuant to which individuals can be held liable for corporate misconduct without involvement in or even awareness of the wrongdoing. Recent indications suggest that regulatory authorities may be planning a more aggressive use of this doctrine, a development that may have disturbing implications.

The responsible corporate officer doctrine was first articulated by the U.S. Supreme Court in the 1943 case of United States v. Dotterweich, in which corporate officers in positions of authority were held personally (and in that case, criminally liable) for violating strict liability statutes protecting the public welfare.

The Supreme Court approved the application of liability under the Food, Drug and Cosmetic Act (FDCA) in the 1975 case of United States v. Park holding that the FDCAs "requirements of foresight and vigilance" are "no more stringent than the public has a right to expect of those who voluntarily assume positions of authority in business enterprises whose services and products affect the health and wellbeing of the public that supports them." The Supreme Court approved the imposition of liability in that case, though the defendant had no involvement in or personal knowledge of the violation.

The responsible corporate officer doctrine has been absorbed into environmental law as well, and, as discussed here, and has served as the basis of imposing liability in environmental enforcement actions.

According to a March 5, 2010 memo from the Skadden law firm entitled "FDA Announces New Push to Prosecute Corporate Officers and Executives for No-Intent Crimes" (here), the FDA, under fire for lack of active oversight of its office of criminal investigations, has advised Congress that it intends to "increase the appropriate use of misdemeanor prosecutions…to hold corporate officials accountable." The law firm memo suggests that this FDA statement to Congress is consistent with the "recent uptick" in prosecutions relying on the responsible corporate officer doctrine against pharmaceutical and medical device executives.

The responsible corporate doctrine unquestionably is a well-established tool for the imposition of liability on corporate officials in the context of public "health and wellbeing." But though well-recognized, it nevertheless has disturbing implications. The FDA’s apparent intention to use the responsible corporate officer doctrine more aggressively arguably is part of a larger and even more disturbing trend to try to hold corporate officers liable without regard to personal culpability.

First, the idea that liability can be imposed on an individual for corporate misconduct, in apparent disregard of the corporate form and without culpable involvement or even a requirement of a culpable state of mind, seems inconsistent with the most basic concepts surrounding the corporate form. The doctrine arguably imposes liability for nothing more than a person’s status. The word "responsible" in the doctrine’s name does not mean that the individual is responsible for the misconduct, but on that that the individual is responsible for the corporation.

Second, the application of the doctrine can have serious ramifications. The Skadden memo points out that in one recent FDCA prosecution, the individuals against whom liability was imposed on the basis of responsible corporate officer doctrine were required to pay criminal fines of $34.5 million (The imposition of liability is currently on appeal.) The imposition of criminal penalties of this extraordinary magnitude without any fault or even culpable state of mind seems fundamentally inconsistent with the fault-based framework of our criminal justice system.

But the most troubling thing about the responsible corporate office doctrine is that the apparently expanded willingness of regulators to use the doctrine to impose liability on corporate officials is entirely consistent with developments elsewhere that also suggest a willingness of government regulators to try to impose liability without regard to involvement of awareness of the alleged wrongdoing.

In that regard, there have been at least two instances recently where the SEC has pursued enforcement actions against corporate officials without regard to their lack of knowledge of the alleged legal wrongdoing. Though these regulatory enforcement actions did not expressly rely on or even refer to the responsible corporate officer doctrine, the enforcement actions implicitly reflect a similar presumption, which is that in certain instances corporate officials can be held liable solely on the basis of their position without respect to the presence or absence of personal culpability.

First, as noted here, the SEC has initiated an enforcement action against the former CEO of CSK Auto, in which the SEC seeks to "clawback" compensation the CEO earned at a time with respect to which the company subsequently had to restate its financial statements. The SEC is pursuing this claim even though the former CEO is not only not charged with fraud, but is not even alleged to have had any involvement in or even awareness of the circumstances requiring the later restatement.

Similarly , the SEC more recently filed an enforcement action seeking impose control person liability on two officer of Nature’s Sunshine Products, in which the SEC sought to hold the individuals liable for the company’s Foreign Corrupt Practices Violation, though the individuals were not alleged to have had any involvement in or awareness of the wrongful conduct. The Nature’s Sunshine Products case is discussed here.

Though these recent SEC enforcement actions did not expressly rely on the responsible corporate officer doctrine, the SEC’s actions in these cases reflect a willingness – similar to that of the FDA and other regulatory authorities — to impose liability on corporate officials without regard to fault or culpability. These regulatory actions raise a very disturbing specter of strict liability for executives.

Even if there are circumstances where, as the U.S. Supreme Court has long recognized, that public health and welfare may justify the imposition of liability without culpability under certain circumstance, the enormous burden this possibility would impose on the civil rights and liberties of the affected individuals would seem to argue that these principles be used to impose liability on individuals only in the rarest and most extreme purposes.

But rather than restrict its use of these principles out of an appropriate respect for basic notions of fairness and individual liberty, regulators are moving in the exact opposite direction and apparently seeking new opportunities to use these principles to expand their regulatory reach.

The regulators may well feel this approach may be justified in order to accomplish regulatory goals and ensure that somebody pays the price for wrongdoing. The problem is that scapegoating individuals for misconduct in which they were not involved and of which they were not even aware is fundamentally unfair. In my view, this approach is inconsistent with some of the most basic assumptions of a well-ordered society governed by law.

If there are circumstances where public health and welfare might sometimes require the imposition of responsibility on a strict liability basis, the use of those circumstances should be infrequent and unusual. Regulators should be looking for ways to avoid relying on these powers rather than looking to expand their use. The imposition of penalties without regard to fault or culpability is a fundamentally unfair practice that should be discouraged at every possible opportunity.

Thank you for this posting and every posting. You provide a valuable service (… oh, thanks for not charging for it.) I have not reviewed the Skadden memo yet, and I agree that liability without culpability is unfair, but do these underlying decisions provide a solid case for the individual directors being culpable for a blatant ‘disregard of the corporate form’ and if not for this alleged breach of their duty no underlying misconduct could have occurred?

Thank you,

Greg

http://www.duanemorris.com Michael E. Clark

Kevin:
A very timely and topical article. This is one of the most dangerous legal doctrines for corporate officers and directors in my opinion. If they work in an industry that courts view as having a lot of interaction with the public safety questions (as you noted, food and drug and environmental–among others), the dangers are heightened. This doctrine was initally approved when the punishment was relatively light (misdemeanors), but over the years has been extended to cases that have severe punishment possibilities (felonies)

Michael

http://www.pltidbits.com Chris Christian

Great post, Kevin.

Although the trend appears most scary, what I’m wondering about, in tandem with Greg, is whether (at least some of) these individuals *should* have known — or were they practicing the art of blissful ignorance?

Do you have a sense for whether the regulators are seeking a responsible person to whom the chain of command would naturally flow along with an assumption that they should have knowledge if they are properly exercising their duties of oversight? Or are they shotgunning or looking for the weak link?

And perhaps more importantly — if an individual is in the dark due to a intentional withholding or misrepresentation of information by the lower level reports upon whom he depends, is that a viable defense? Perhaps with evidence of his due diligence thwarted by wrongdoing?

Interesting developments. Thanks again for sharing.

Jim

Kevin,
Thnx for the blog – it’s very good.

Hence, Iâ€™m hard-pressed to see a problem with this situation, provided the bonus and/or stock sale profits can be tied to the fraud. (Admittedly, Iâ€™m biased as I think it is outrageous the SECâ€™s has not brought more of these actions, especially since Section 304 denies private litigants a right to seek clawbacks). Yes, executives may have to pay legal fees to defend the action. Alternatively, however, the executive could just admit he/she did not really â€œearnâ€� the bonus or stock-sale profits and pay it back w/o prolonged litigation. (Frankly, more companies should insist on clawbacks in this situation).

Natureâ€™s Sunshine Products seems distinguishable. Here, the SEC sought to penalize individuals who allegedly had no knowledge of FCPA violations by subordinates. Without any showing that the executives benefited from the subordinates FCPA violations, I can see your point that this situation is troubling.

Disclaimer

The views expressed on this site are exclusively those of the author, and all of the content on this site has been created solely in the author's individual capacity. This site is not affiliated with his company, his colleagues, his clients, his relatives or any other institution or person living, dead, or yet to exist. Quotations from this site should credit The D & O Diary. However, this site may not be quoted in any legal brief or any other document to be filed with any Court unless the author has given his written consent in advance. This blog does not intend to provide legal advice. You should consult your own attorney in connection with matters affecting your own legal interests.